Sterling Climbs After UK Inflation Beats Expectations

LONDON (Reuters) – Sterling strengthened on Tuesday as data showed British inflation unexpectedly stayed close to its highest levels in six years in January, firming up investors’ bets that the Bank of England will raise interest rates again in May.

The BoE surprised financial markets last week by indicating that rates could move up faster than previously expected, as the Bank wanted to bring inflation back to its target of 2 percent within two years rather than three.

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This prompted markets to price in as much as a 70 percent chance of a quarter-point rise in interest rates by May, and a roughly 50 percent chance of a further increase in rates to 1 percent by the end of the year – a level last seen in 2009.

Tuesday’s numbers showed consumer price inflation (CPI) held at an annual rate of 3.0 percent in January, unchanged from the month before and above a consensus forecast of 2.9 percent.

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“This adds further weight to the case for higher interest rates sooner rather than later,” wrote Hargreaves Lansdown economist Ben Brettell in a note to clients.

“It seems domestically driven inflation could seamlessly take over from the sterling-related price rises we’ve seen since the Brexit vote. If this is the case, some tightening of monetary policy looks increasingly appropriate.”